Debt and taxes. They’re both too high, right? But your debts may actually help keep the evil twin at bay. Why? At least some of that interest you shovel out each month is probably tax-deductible.
Back in “the good old days,” taxpayers were allowed to deduct all their interest charges, even on credit-card bills to pay for vacations, Armani suits and movie tickets. Then Congress caught on and nixed that deal.
Now our beloved Internal Revenue Code permits deductions only for certain varieties of interest. This makes debt management more important than ever, because you are basically penalized by the IRS whenever you have interest that falls into the nondeductible category. Here’s a summary of when you get a tax break for borrowing and when you don’t.
Home-mortgage interest
You are allowed an itemized deduction for interest on up to $1 million worth of mortgage debt used to acquire or improve your main personal residence and one other home. Mortgage interest on your third personal residence and beyond is considered a nondeductible personal expense.
So the tax-wise debt-management trick here is to: (1) make sure you don’t have over $1 million in mortgage debt and (2) pay cash for your third, fourth and fifth homes. We should all have such financial challenges.